Case ERCOT, USA:


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TO 20% EQUITY IRR




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THE BUSINESS CASE FOR EXTREMELY
FLEXIBLE PEAKERS IS HERE

ERCOT’s real time price adder has been increased from $3000/MWh to $9000/MWh to reflect the value of spinning and non-spinning reserves based on the value of lost load and the loss of load probability. Today, the fast-movers make money with 5-minute dispatch cycles. How do 10% project IRR and 20% equity IRR sound to you?


ERCOT-Document







IPP VALUE PROPOSITION FOR ERCOT







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THE BEST POWER GENERATION INVESTMENT
FOR THE ERCOT MARKET










“Wärtsilä was chosen due to the efficiency of their
engines and fast start capability which will
allow GEUS to self-provide energy during
intervals of high market prices.”

MR. DAVID McCALLA, GENERAL MANAGER, GREENVILLE ELECTRIC UTILITY SYSTEM








SHORTAGE = OPPORTUNITY?

In a state where 1000 new residents are added each day, ERCOT has repeatedly set new demand records. Along with rising demand, recent generating unit retirements and the cancellation or postponement of several capacity projects has presented new challenges to maintaining adequate planning reserve margins.

Studies indicate that ERCOT could see reserve margins drop below established reliability targets in the coming years. Prices in ERCOT’s energy-only market have been unable to attract sufficient investment to ensure adequate capacity reserves, so the system-wide scarcity pricing cap has been increased, reaching $9000 per MWh in 2015.








Source: Rose, Judah, Muthiah, Shanthi, Brock, Frank, Korp, Johan & Trisagni, Sakya (2014).








Rising demand, extreme weather conditions and generating unit retirements – all drive the electricity prices upwards in ERCOT.



SHORTAGE = OPPORTUNITY?

In a state where 1000 new residents are added each day, ERCOT has repeatedly set new demand records. Along with rising demand, recent generating unit retirements and the cancellation or postponement of several capacity projects has presented new challenges to maintaining adequate planning reserve margins.

Studies indicate that ERCOT could see reserve margins drop below established reliability targets in the coming years. Prices in ERCOT’s energy-only market have been unable to attract sufficient investment to ensure adequate capacity reserves, so the system-wide scarcity pricing cap has been increased, reaching $9000 per MWh in 2015.

Rising demand, extreme weather conditions and generating unit retirements – all drive the electricity prices upwards in ERCOT.

ERCOT graphic1

Source: Rose, Judah, Muthiah, Shanthi, Brock, Frank, Korp, Johan & Trisagni, Sakya (2014). 




BEYOND THE DAY-AHEAD MARKET

Typically, the IPP investment business case in ERCOT is to provide Day-Ahead Market heat rate call option to a Load-Serving Entity, backed by an open cycle gas turbine (OCGT) power plant. Back-cast analysis using historical price and temperature conditions during 2011–2014 has shown that the fair market value of a heat rate call option based on Smart Power Generation (SPG) is higher than that of the OCGT. This is because SPG has higher efficiency and less derating at high temperatures than the OCGT.

To thoroughly examine project feasibility and internal rate of return (IRR), Wärtsilä has conducted detailed dispatch and financial modeling for SGP and OCGT power plants in the ERCOT Day-Ahead (DA), Real Time (RT), and Ancillary Services (AS) markets for 2011–2014. SPG financially outperforms the OCGT due to the superior flexibility. The ability of SPG to start up within 5 minutes, reduce load to 20% of full capacity, and incur no maintenance penalties from frequent starts and stops allows SPG to participate in ERCOT’s AS market, offering a variety of AS products as shown in the below figure.








SPG generates more revenue than the OCGT

Because of the longer startup time of the OCGT and increased maintenance costs associated with frequent starts, the OCGT project could only offer limited ancillary services. As a result, SPG is able to achieve 19.3% equity IRR and 10.3% project IRR, while the OCGT is only able to achieve a 9.2% equity IRR and 6.4% project IRR.










   

SPG generates more revenue than
the OCGT due to greater dispachability in markets







Equity IRR in the different market
participation cases (assumed equity
share: 30%).



As market conditions predict there will be higher price spikes in ERCOT in coming years, and increasing demand for hedging products which will drive up the hedge prices. The more valuable heat rate call optionability to earn revenue for several markets, and higher IRR makes SPG a superior investment for IPPs compared to OCGT.



BEYOND THE DAY-AHEAD MARKET

Typically, the IPP investment business case in ERCOT is to provide Day-Ahead Market heat rate call option to a Load-Serving Entity, backed by an open cycle gas turbine (OCGT) power plant. Back-cast analysis using historical price and temperature conditions during 2011–2014 has shown that the fair market value of a heat rate call option based on Smart Power Generation (SPG) is higher than that of the OCGT. This is because SPG has higher efficiency and less derating at high temperatures than the OCGT.

To thoroughly examine project feasibility and internal rate of return (IRR), Wärtsilä has conducted detailed dispatch and financial modeling for SGP and OCGT power plants in the ERCOT Day-Ahead (DA), Real Time (RT), and Ancillary Services (AS) markets for 2011–2014. SPG financially outperforms the OCGT due to the superior flexibility. The ability of SPG to start up within 5 minutes, reduce load to 20% of full capacity, and incur no maintenance penalties from frequent starts and stops allows SPG to participate in ERCOT’s AS market, offering a variety of AS products as shown in the below figure.

SPG generates more revenue than the OCGT due to greater dispachability in markets

ERCOT graphic2

Because of the longer startup time of the OCGT and increased maintenance costs associated with frequent starts, the OCGT project could only offer limited ancillary services. As a result, SPG is able to achieve 19.3% equity IRR and 10.3% project IRR, while the OCGT is only able to achieve a 9.2% equity IRR and 6.4% project IRR.

Equity IRR in the different market participation cases (assumed equity share: 30%).

ERCOT graphic3

As market conditions predict there will be higher price spikes in ERCOT in coming years, and increasing demand for hedging products which will drive up the hedge prices. The more valuable heat rate call optionability to earn revenue for several markets, and higher IRR makes SPG a superior investment for IPPs compared to OCGT.





STEC already built 200 MW of SPG in ERCOT...

...and decided to invest in another +200 MW of SPG!



The South Texas Electric Cooperative (STEC) is a
generation and transmission cooperative that runs
Pearsall Station power plant in the ERCOT network
in Texas, USA. Originally, STEC invested in this
plant in order to efficiently balance fluctuations in
wind power, but over the years the market changes
in ERCOT has turned Pearsall into a veritable
cash cow.



"Wärtsilä engine technology has proven to be very
effective at meeting the challenges of a dynamic
ERCOT market. We see continued value in
investments in flexible, efficient combustion
engines to serve the needs of our member
cooperatives, and we are very pleased to work
with Wärtsilä on our Red Gate Power Project"
,
says John Packard, Manager of Generation,
STEC.

Pearsall_US





PEARSALL STATION

STEC2





       RED GATE



“Wärtsilä’s solution has allowed us to respond
to changes in the grid when the wind stops blowing,
being able to keep the plant at peak efficiency
at all times thanks to the ability to dispatch
the units in increments that fit our load.”

MR. JOHN PACKARD, MANAGER OF GENERATION, SOUTH TEXAS ELECTRIC COOPERATIVE  







LET’S TALK

The real time & ancillary services markets and Smart Power Generation technology are a perfect 5-minute match, representing a remarkable business opportunity in the Electric Reliability Council of Texas area.

Analysis clearly shows that regardless of the price patterns in the future years in ERCOT, a heat rate call option with SPG technology is a better option than a OCGT heat rate call option. Please download the full study, free of charge on this site, and see for yourself!

We believe we have the best solution that will give you a strong edge over your rivals.


spp-lets-talk-4

MATTI RAUTKIVI
Origination, Americas




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